An increase in savings into pension funds may increase the amount of investment available for productive assets, the Financial Services Regulation Committee has found, although concerns around mandating pension fund investments remain.

As part of its inquiry on the progress made in driving UK regulators to support growth, both in the financial services sector and in the wider UK economy, the committee received evidence suggesting that the UK pension sector is "fragmented" and underinvests in productive domestic assets due to cultural and regulatory disincentives.

Witnesses also connected the low levels of investment into productive assets by UK pension funds with a culture that emphasises low management costs.

However, the committee said that it had received evidence that the government and Financial Conduct Authority (FCA) have moved to address this issue.

In particular, several witnesses welcomed the steps taken to address the investment culture in pension funds, particularly the FCA’s proposed reforms to the value for money (VFM) framework guidance for defined contribution (DC) pension trustees, which it suggested could support greater investment in productive assets.

Despite these reforms to the value for money framework, the committee found that regulation remains a barrier to ensuring that UK pension funds can invest in productive domestic assets, with particular concerns raised over the "significant overlaps" between the FCA and The Pensions Regulator (TPR), which regulate different pension classes.

"We heard that these overlaps have resulted in a disjointed approach to supporting increased pension fund investment into UK productive assets; we note the government’s Manifesto commitment “to deliver greater investment in UK productive assets and better returns for UK savers," it stated.

"This divergence between the FCA and TPR limits the number of funds that can invest into productive assets and creates another point of fragmentation in the pension sector.

"Moreover, we received evidence that emphasised the need for UK pension funds to invest more in domestic capital markets, particularly UK equities."

However, the committee emphasised that although witnesses felt that pension funds could allocate a higher proportion of investment into domestic capital markets, assets, or private markets, "this must be done on a voluntary basis".

Given this, it said that whilst it welcomes the government's pension reforms, it holds "serious reservations" regarding any proposal to mandate pension funds to comply with a prescribed asset allocation.

"We are concerned that such a mandate compromises trustees’ fiduciary duty to their members," it stated. "We will continue to monitor the government’s pension reforms."

The committee also suggested that whilst the reforms to Solvency UK, and the ongoing pension reforms, may help to deepen the UK’s capital markets, the widespread and quick allocation of investment by the sector rests on the FCA and PRA acting as proportionate and enabling forces to allow firms to quickly take advantage of developing opportunities.

"The regulatory environment has inhibited those who have sufficient savings and may benefit from investing," it stated.

"The committee recognises the inherent benefit to consumers who can invest and benefit from higher returns and recognises these reforms could help deepen the UK’s secondary capital markets."

"However, we did not receive satisfactory evidence to suggest that the creation of an equity investment culture in the UK would, by itself, increase productive investment, nor facilitate growth in the wider economy."

Greater pension savings could have more of an impact, though, as the committee said that "an increase in savings into pension funds may increase the amount of investment available for productive assets".

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